Taking the Bite Out of a Price Increase
Life was a lot less fun for Robert Ingrassio two years ago. His $3-million business, CQC Dental Laboratory, which makes dental crowns and dentures, faced new pressures. Some of CQC's customers were considering buying from cheaper overseas manufacturers instead of from Ingrassio's 50-employee lab in Rochester, N.Y.
Competing on price wasn't going to work for CQC, Ingrassio decided. While revenues had grown each year since the company's inception, in 1986, margins hadn't because of rising labor and materials costs. Unwittingly, he'd grown a company that needed to sell large volumes to produce profits. And the demands of high-volume manufacturing were stressing out his employees.
In a counterintuitive move, Ingrassio decided to boost profits and ease production pressures by raising prices for the first time in his business's history. He believed he had the talent to create crowns of superior quality -- superior enough that sales of the new, more expensive products would offset any decrease in volume caused by defecting dentists. In fact, he was prepared both to lose a small percentage of clients and to see several accounts shrink.
Still, Ingrassio wanted to make the rate hike as palatable as possible. So he changed CQC's price structure in a way that clarified his reason for the increase. He divided prices into two components: fixed (labor) and fluctuating (materials). In the past Ingrassio had charged flat, per-unit prices. Previously, if the price of the metals used in making crowns rose, he absorbed the extra cost. But by separating out the materials cost, Ingrassio covered himself in the event of rising -- or falling -- materials prices. Consequently, the level of his profits became predictable, since it depended only on what he charged for labor.
CQC lost only a few cost-sensitive customers; it retained 97% of its customer base. More important to Ingrassio, margins increased 15% in 2000 -- even though sales growth, at 12%, was CQC's lowest in years.
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